I was back with my fav'rite host, Sir Larry Kudlow, on Wednesday night. By my record, I have now been on CNBC's "The Kudlow Report" (or the old "Kudlow and Company") on nearly 50 occasions. While Larry and I typically don't agree on the political issues or even on economic forecasts, I admire him greatly on a number of levels. He is a dear friend, and our volleys are always fun and stimulating. Last night was no exception!

This time we were joined by the eclectic, personable and overall nice guy Jim Paulsen, who is the chief investment strategist at Wells Capital Management. Stated simply, Jim is among the best strategists around. I admire his practical approach and the rigor of his analysis. Importantly, he has a great sense of humor, and is a terrific communicator and worthy opponent in debate.

My points were:

Alcoa: The Alcoa (AA) release last night was not an important positive tell. My view expressed last night was that the Alcoa earnings give little clarity as to whether there will be meaningful top-line growth in American industry over the next several quarters.

The media rhetoric on the AA quarter has gotten hyperbolic. This is a company that has had nine consecutive sales declines -- and this year's (year-over-year) drop was more than 30%! Aluminum is a cyclical business, and the company only beat the consensus sales forecast of $4.55 billion by $75 million -- basically a rounding error. The company has $1 billion of cash and is being weighed down by $10.5 billion in debt! Moreover, the quarter benefited from several nonrecurring gains: a tax credit and a gain from asset sale. As well, cost-cutting of 20,000 employees aided results.

So, when observers grow excited because Alcoa earned a few pennies against the expectation of a modest loss. it has to be put into perspective. The average price of aluminum rose by 24% in the quarter, but Alcoa's revenue rose modestly on a sequential basis. Indeed, Aloca's actual unit shipments dropped by 4.5%!

To summarize, with the exception of China, most of the company's markets remain very depressed, and cost-cutting caused the small earnings beat. Revenue was $75 million above consensus -- less than 2% -- even in the face of a 24% sequential rise in aluminum prices. It was a quarter full of sound and fury signifying nothing ... except to the media.

Cost-cutting has its downside: The consumer remains the Achilles' heel of the economy, and I question the ability of the domestic economy to have a self-sustaining recovery because of my expectation of an elevated level of joblessness and continued wage deflation.

Wall Street is a long way from Main Street: All day long I meet with companies, talk with companies and make channel checks. The weakness I see on Main Street was demonstrated in several anecdotes I made last night. A friend owns a restaurant in Westchester County. His business is off 25% to 30% from Labor Day (far worse than seasonal). His Coca-Cola representative said orders dropped dramatically in same timeframe (September) -- again, far worse than seasonal. Same for his meat guy ... business slipped badly.

A week ago I visited one of the largest independent distributors of dental products -- business had weakened in the last five weeks. On Tuesday and Wednesday I spoke to four dentists -- each had previously said business had stabilized in separate conversations over the summer. All four now say business has suddenly turned negative.

Maybe Westchester county is in dire straits (it's not!), maybe my pal's restaurant has grown unpopular in the last few weeks (it hasn't!), maybe no one has cavities because they stopped drinking Coca-Cola (!!) and maybe meat sales for restaurants are poor because everyone is eating chicken or pasta ... or maybe all of this is a sign of eroding economic conditions that are being ignored by investors in the face of the strength in the stock market's price momentum supplied by a huge surge in liquidity as central bankers put a curse on cash!

On gold and inflation: I remarked that the reflation experiment has its limitations. There is not an unlimited supply or credit, nor is there an unlimited supply of trust. Interest rates and inflation are inevitably moving higher. I just don't know when!

Mounting due bills: The due bills of higher marginal taxes and inflation pose a unique and historically unprecedented headwind to growth.

What replaces real estate in driving the U.S. economy?: I don't see a driver to replace the strength in residential and nonresidential real estate of the 2002-06 period.

What to buy?: Stick with large multinationals that will benefit from a lower U.S. dollar. Companies like Pepsi (PEP) and Procter & Gamble (PG) generate large amounts of free cash flow, are self-financing and have dominant product market shares.

Jim Paulsen believes corporate cost-cutting is a huge asset and will be a driver to earnings growth in the quarters ahead. The just-completed third quarter will be the first in which we test-drive his theory. He sees overwhelming evidence of momentum in the economic recovery. He cited the ISM strength as an example, and he rejected my concerns regarding decelerating growth in durable goods, housing sales and a still-weak jobs market. Jim sees price stability over the short term and a big market move before my "due bills" are delivered. He favors the emerging markets over the U.S. stock market.

About Me

Larry Kudlow

Lawrence Kudlow is CNBC’s Senior Contributor. For many years, he was the host of CNBC’s “The Kudlow Report”. He is also the host of The Larry Kudlow Show, which broadcasts on Saturdays from 10am to 1pm ET on WABC Radio and is syndicated nationally by Cumulus Media. He is also a nationally syndicated columnist and a former Reagan economic advisor. CNBC's The Kudlow Report also airs on Sirius (ch.129) and XM (ch.127) weeknights at 7pm ET.